Stericycle (NASDAQ:SRCL) shocked investors this week when it reported subpar results after the closing bell on Thursday. Revenue and earnings came in well below the company's guidance when it was unable to clean up after being affected by weak foreign currencies, lower hazardous-waste volumes, and higher unanticipated expenses.

Stericycle results: The raw numbers

 

Q3 2015 Actuals

Q3 2014 Actuals

Growth (YOY)

Revenue

$718.6 million

$667.9 million

7.6%

Non-GAAP Gross Profit

$300.2 million

$279.5 million

7.4%

Non-GAAP EPS

$1.08

$1.08

Flat

Data source: Stericycle.  

What happened with Stericycle this quarter?
Stericycle came up quite a bit short of its history and expectations this quarter.

  • Revenue increased by 7.6% to $718.6 million, which was a bit less than the market was expecting. Furthermore, it is well off its historical pace of delivering double-digit annual revenue growth.
  • Foreign currency fluctuations again reared their ugly head, shaving $33 million off the company's top line.
  • The biggest culprit, however, was weaker hazardous waste volumes, some of which were directly related to the drop in energy and commodity prices.
  • Earnings were also a disappointment, with GAAP earnings plunging 51.6% to $0.47 per share while non-GAAP earnings per share came in flat, which missed its guidance by a dime per share. The company had a number of unanticipated expenses pushing earnings lower including higher professional fees, a shift in customer mix, and slower-than-anticipated worldwide project work.
  • Margins also slipped a bit after non-GAAP gross profit as a percent of revenue fell to 41.8% from 41.9% in the third quarter of last year.

What management had to say
CEO Charlie Alutto led off the company's conference call discussing the results by saying that:

[...] Our results were unfavorably affected by the following key factors, the strengthening of the U.S. dollar, lower hazardous-waste volume from our industrial customers and some higher-than-anticipated expenses in certain lines of business. Although we're disappointed with the results and the third quarter, the long-term fundamentals of the Company remain strong.

While Alutto is positive on the company's longer-term fundamentals, he's not quite so bullish in the short term. In the question-and-answer session of the call he warned that "we think that the slowdown which we saw accelerate in the third quarter is going to actually get worse in fourth quarter and then level off in 2016." The big unknown is that given the fact that the company didn't see the slowdown coming in the first place, it really remains to be seen if volumes will indeed level off next year as it now expects to see. 

With the weakness in industrial waste, it does seem like the company's recently closed acquisition of information destruction services provider Shred-it International from Cintas (NASDAQ:CTAS) and its partners is a smart play. Not only will it enable the company to move away from a weak spot in the market, but it gives it another market to drive growth. In discussing that transaction on the call, CFO Brent Arnold said, "The acquisition team is off to a quick start, driving operational synergies and laying the groundwork for long-term growth." In addition, management pointed out that it was especially excited about the cross-selling opportunities given that less than 20% of its current customers utilize Shred-It, which is a number they expect to increase in the future.

One thing that's worth noting is that Cintas never really fully integrated Shred-It into its business because it was an investment that Cintas co-owned with other partners. So, it will be interesting to see how the business performs now that it is under new management that is focused on integrating it into its service offerings to customers.

Looking forward
Stericycle's management team also provided insight into its current guidance for 2015 and its preliminary guidance for 2016. The company expects to generate revenue approaching $3 billion this year, with non-GAAP earnings in a range of $4.38 to $4.41 per share. That's a bit muted from its previous guidance due to the weakness in industrial hazardous waste.

However, looking ahead to 2016, it sees growth resuming, thanks in part to the addition of Shred-It. For the full year, the company forecasts revenue in the $3.65 billion-$3.72 billion range, with non-GAAP earnings growing to a range of $5.28 to $5.35 per share.

 

Matt DiLallo owns shares of Stericycle. The Motley Fool owns shares of and recommends Stericycle. The Motley Fool recommends Cintas. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.